One of the keys to wealth is being able to leverage your wealth. To allow our money to passively work for us and generate a return without having to spend significant amounts of time doing it. One of the best ways to do that has been in the stock market. Unfortunately we know that the stock market goes up and down. We have even had a few times when the stock market will crash. A stock market crash is defined as any time we have a sudden dramatic move downward in stock market pricing. Can anyone give a stock market prediction for 2009?
The Silicon Valley Blogger at TheDigeratiLife has recently been discussing the direction of the stock market. I was posting a reply that became very lengthy when I realized it would make a good blog post. Do we know where the stock market is going? Check out her post to see the foundations of my answer. I refer back to some of her comments and positions.
A Discussion on Stock Market Prediction
I always find these discussions very interesting. First let me say I have absolutely no idea which way the market is going to go. If I did, I would buy a ton of options and then several islands with the profits 
So I won’t give you a stock market prediction, just my analysis and conclusions of possible outcomes. So now that we have out of the way. There are two ways to look at the markets – fundamentally and technically.
Stock Market Prediction – Fundamental Analysis
Several fundamental issues were brought up including the increasing earnings from companies. On the surface those looked great this past reporting cycle. The problem with most of them is they came from significant cost cutting and not improved sales. You can only cut so far before things before earnings stagnate. Based on current price to earnings (P/E) ratios we are more likely due to have a long slow go nowhere decade until earnings do improve. If I was a betting man I would suggest we are closer to a high for the year in the stock market than we are to a low. Expect August to finish lower and the rest of the year to do the same.
We all suffer from recency issues. We value things that have happened most recently over those that happened 20 years ago or are only written in a history book. Most of us had our perception of the stock market formed in the bull market of the 90s. And while we have had 2 significant corrections since then, most of our psychology is rooted in the bull markets. We believe the crashes were blips on the radar. But to fully understand stock market history we must study stock market history. One really good source to do that is Stockcharts.com. I have linked directly to their stock market history section. They have graphs that show the stock market back to the 1900s for the DOW and the 1960s for the S&P500. Take some time to study the 1930s on the Dow. While the Crash of 1929 is what most remember, notice that the bottom doesn’t hit until 1932 with some pretty impressive rallies along the way. Remember that almost no one gave a stock market prediction that included that downturn.
Stock Market Prediction – The Second Great Depression?
I know a lot of people get upset when you compare today to the Great Depression. Things are very different now than during the Great Depression. I once heard it said that history more often rhymes than repeats. It may not exactly duplicate itself but we can always learn by studying history. In the Great Depression the stock market crash lasted for over three years. It consisted of a 90% decrease in the valuation of the stock market. People who bought near the top took nearly 25 years to reach that level again. I think for many of us 31 years would consist of long term investing. That is a long time just to break even (and that doesn’t even take into account inflation).
Graph provided by Stockcharts.com
So if we aren’t going to repeat the Great Depression maybe we should look at another time frame? One that many of us can remember or our parents can was the 1970s. It actually stated in 1962 when we embarked on a bull market run that increased the stock market by about 80%. I won’t bore you with the details. I think a picture is worth a thousand words.
We hit a high in 1966 and spent a decade trying to break above it and stay there. When it comes to the stock market, it always pays to keep things in perspective. You will find as many opinions as you want on the value of technical investing or fundamental investing. If you are going to be serious about the stock market or have a significant portion of your retirement in the stock market, you need to educate yourself. Read opposing opinions. Test what they say against what you see actually happening. I have found several resources that have been beneficial over the years.
Here is a brief list of the better ones.
Safehaven – They publish articles written from many different viewpoints. One viewpoint you won’t find on display very often though is extreme optimism
Stockcharts This is a great site that includes graphs as well as educational articles. They tend to focus on the technical analysis side and provide a ton of tools, a good newsletter, and a great historical perspective.
John Mauldin – John is a best selling author, a newsletter publisher (free) and a paid to refer money managers. Not really sure how to describe the last part. He doesn’t actually manage money but rather studies and recommends the best and brightest money managers to his clients. Sign up for both Thoughts from the Frontline and Outside the Box. I like John’s writings because he doesn’t mind presenting an opinion that is different from his. These two newsletters are not for the casual reader. If you are interested in learning about how to use the stock market to increase your wealth, you need to understand how it works. Take the time to read his stuff. He won’t give you a stock market prediction but does give his observations and experience.
Most importantly don’t depend on CNBC or CNN to give you the full picture. They get paid to bring entertainment and the highlights of a story. Understanding the stock market takes more than just listening to Breaking News segments. Every day on these channels they bring experts who give stock market predictions. Often they contradict themselves. Treat it as entertainment.
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Read my update on the Stock Market Here
PS As with everything in life, develop a plan, test it against the world and adjust as needed. Plus sign up my newsletter so you don’t miss anything. I often send out specials to the newsletter list that don’t show up in the blog. It’s the only way to stay in touch
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